Yes, that’s right. Soon we find many businesses in South and Far East Asia, Africa and parts of CIS displaying those boards. Chinese government is offering incentives to its citizens in border provinces to trade with Yuan (RMB). Let us look at some numbers to see how much steam does this Yuan–based trade has.
In 2007 China has exported USD 1.2178Tn and imported USD 0.956Tn gaining a very large trade surplus. Around 48% of their exports are destined to the US and EU 27 together. Whereas they import ~20% of their total imports from these two geographies. But quite significantly if we leave Japan with whom they trade 10% of their total external trade (imports and exports with Japan = USD 211Bn), close to 30% of their exports reach states that are neither $, € nor ¥ based. They source half their imports also from these same sates, bringing total contribution to their total external trade from these geographies to ~41%. They are finding it avoidable to trade with USD which they consider a weakening currency, when they are dealing with the rest of the world.
The statistics from WTO give us some insights on that 40+%. Chinese imports from the 6 East Asian traders (6EAT = Hong Kong, South Korea, Singapore, Chinese Taipei, Thailand and Malaysia) has shown a significant growth with a CAGR of 42% since 1997 till 2007 whereas exports from China to this region registered a CAGR of 11% during the same period. Within the same decade their trade with rest of the Asia has also shown significant upsurge. The Chinese exports to those states clocked a 24% CAGR while imports registered >90% CAGR. Majority of the 6 East Asian traders have reasonably strong and internationally liquid currencies. The imports from this part of area (6EAT + other Asian) to China have reached to USD 372.5 in 2007 whereas they stood at 9Bn in 1997. Asian financial crisis and relatively stable political environment in most of the Asia (after the crises until 2007) should explain the low and stellar growth in that number. The exports from China to this region have also exhibited similar behavior starting at USD 75.4 Bn in 1997 reaching 280.5Bn in 2007 - China has a trade deficit with this region. In 2007, 6 EAT have USD 106.3Bn surplus with China. Since 2000, this has been the case albeit with lower amounts.
Chinese imports and exports to Brazil grew at CAGR 28% during 1997 - 2007. Around the same time Sino-Russian trade has also flourished. Today they export USD 28.5Bn worth of produce to Russia and import 19.7Bn. Their trade CAGR during this decade stands at 30% for exports and 17% for imports. Both Russians and Brazilians have been very vocal about their reservations on USD strength and its status as global reserve currency. Recent gas supply agreements with CIS states will give Chinese yet another opening to push RMB. Most of the pipeline network expansion will be funded by the Chinese government.
South Africa (ZA) and the rest of the Africa have been recognized for their strong trade ties with China. ZA sold goods and services to China worth USD 6.6Bn in 2007 and purchased 7.4Bn worth. The other African nations have also exported and imported USD 29.7Bn and 29.1Bn respectively. The CAGR for 1997 – 2007 stands at 33% for exports & 28% for imports from China. As the trade is well balanced there is no incentive for the Chinese to deal with USD. It is the recipients that need to consider whether it is risky to trade in Yuan. Many governments in Africa receive Chinese financial support. At present thousands of Chinese work in that continent. Chinese senior leadership paid numerous visits to several republics in Africa, successfully sidelined international criticism and pledged aid & debt support.
To sum up all the above numbers, out of USD 2.1Tn international trade, only 769Bn stems between US+ EU27 and China. 889Bn is carried out with 6EAT, Other Asian states, Brazil, Russia and some of the CIS and African nations. Chinese must be aiming at this number for USD independence. Chinese political and financial muscle may help them achieve that proportion. Any external trade in RMB will always offer the Chinese an excellent diversification opportunity from the USD. Whereas the FDi from the western markets still flow to China in large numbers primarily due to the investor confidence in possible GDP growth rate that is far too higher than that of many of the G-20 and EME. This influx ensures the forex reserves that Chinese may still spend in buying some of the USD treasuries. Another possibility: direct investments from the above said Non-EU27+US states in China to cement their economic ties or to participate in the booming economy or to hedge their RMB exposure. This will help the Chinese’s pursuit for forex diversification and sustained RMB based trade. These developments of-course ensure Uncle Sam continue to have his Chinese credit card albeit with reduced credit limit while the Chinese will have few Billon trade payments diversified / insured from USD.
If a state (thru its businesses) is trading with China in RMB, they and the Chinese both can avoid USD exposure and hence bring down the risk and the need for hedging. “Why bring in outsider currency (USD) in a bilateral trade that involves a strong and liquid (referring to bilateral trade flows) currency – RMB?”
Annual trade potential of up to USD 900Bn and a set of financial instruments to complement RMB based transactions can quickly make the RMB one of the most liquid and dependable currencies right along with $, €, £ and ¥ placing it in the club of key global currencies. Probably Japanese Yen will receive some adverse effect. With debt hovering around 170% of their GDP, prevailing Japanese economic health will only boost the pressure. With growth complemented by strong currency (even if it is artificially maintained), RMB can be perceived as a better bet, automatically drawing attention from the global markets. If this were to realize, Oil exporting states from the Middle East who are also looking for diversification and who have also significant imports from China will have limited reservation to base part of their trade with China in RMB even if their oil exports are also significant.
However all the above said could be challenged if the EU27+US imports from China continue to decline. In 2007 Chinese exports to EU27+US stood around 587Bn while imports were at 180Bn. The overall trade surplus for China is originated from this difference alone. In the light of its trade deficit with Non-EU27+US; this surplus for China can be explained if we consider that they import most of their supplies from Non-EU27+US, process it within China and export most of it to EU27+US, locking in the value added. It was already observed that during the crises, when the exports fell, the imports also fell quite significantly, substantiating our reason. The sudden spurt in domestic lending has caused many investors to shy away from Chinese debt purchases, sighting potential bubbles.
The riots in Xinjiang province are going to put Chinese in a box until they release yet another set of spectacular numbers. The Chinese can alleviate those fears arguing that economic crisis is a short term phenomenon and riots are temporary disturb